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The U.S. Dollar Slips At The Start The New Week

By Marc ChandlerForexNov 15, 2021 06:04AM ET
The U.S. Dollar Slips At The Start The New Week
By Marc Chandler   |  Nov 15, 2021 06:04AM ET
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While the Belarus-Poland border remains an intense standoff, there have been a couple other diplomatic developments that may be exciting risk appetites today. First, Biden and Xi will talk by phone later today. Second, reports suggest the UK has toned down its rhetoric making progress on talks on the implementation of the Northern Ireland Protocol.

Equities in the Asia Pacific region were mostly firmer, with China a notable exception among the large markets, even though the October data was generally stronger than expected. Europe's Stoxx 600, which has fallen only once this month, was edging higher to new records, while US futures were enjoying a firmer bias.

Benchmark 10-year yields were 1-2 bp lower, which put the Treasury yield near 1.55%. The European periphery was outperforming the core.

The dollar was soft. The Scandis and Antipodeans led the move, while the euro, yen, and British pound were little changed. Emerging market currencies were also mostly stronger. Here the Philippine peso was notable as it fell the most in seven weeks as corporates bought dollars. After falling by 0.65% last week, the JP Morgan Emerging Market Currency Index was edging higher today.

Gold snapped a seven-day rally, stalling near $1868. Support was seen in the $1842-$1845 area. January WTI was sold again as it poked above $80. It was pinned near last week's lows (~$78.65) as the US response was awaited. European natural gas futures were firm as the capacity auction results were awaited, and Europe faced its first cold snap of the season. Iron ore and copper prices were posting small losses.

Asia Pacific

Japan's Q3 GDP disappointed, but it is old news and will likely spur Prime Minister Kishida to support a large supplemental budget, which could be unveiled by the end of the week. Economic growth in the world's third-largest economy contracted for the fifth quarter in the past eight. The 0.8% loss of output in Q3 was more than the 0.2% expected by the median forecast in Bloomberg's survey. Consumption (-1.1%), business spending (-3.8%), and public investment (-1.5%) did the most damage. The GDP deflator was unchanged from Q2 at -1.1%.

The Japanese economy has been recovering here in Q4. Talk of the size of the supplemental budget has increased to around JPY40 trillion (~$350 bln) from JPY30 trillion. It has been expected to include a cash payment for 18-year olds and younger, a tax break for companies that boost wages, a new subsidy for domestic travel, and pay hikes for caregivers.

China's October data was stronger than expected but does not shake off concern that the world's second-largest economy was struggling. The year-over-year pace of retail sales rose for the second consecutive month in the face of expectations for a decline. The 4.9% increase followed the 4.4% gain in September and 2.5% in August. In October 2020, it rose 4.3% year-over-year.

Industrial output rose 3.5% from a year ago. It was the first increase since March. Last October, it had increased by 6.9%. The surveyed joblessness was steady at 4.9%. Fixed asset investment and property investment slowed. Chinese officials have not addressed the economic slowdown with large-scale fiscal or monetary initiatives.

We have suggested that the dollar-yen exchange rate has entered a new range after trending higher from mid-September through mid-October. That new range was likely JPY113-JPY115, and to find the floor, the dollar briefly traded below JPY112.80 last week. After spiking back to JPY114.00 on the US CPI surprise, the greenback continued to hover around there, the middle of the range. Tomorrow's expiring options ($830 mln at JPY113.40 and $1.6 bln at JPY114.30) may mark the near-term range.

The Australian dollar was building on its pre-weekend recovery. It saw a low slightly above $0.7275 on Friday and settled on its highs (a little above $0.7330). It rose to $0.7365, and the intraday momentum was getting stretched. Look for resistance near $0.7375.

The greenback edged slightly lower against the Chinese yuan to record a new six-month low (~CNY6.3785) before recovering within a narrow range. It was trading slightly above CNY6.3830 in late dealings. The PBOC set the dollar's reference rate at CNY6.3896, a little below the median forecast of CNY6.3896 (Bloomberg survey). The PBOC rolled over in full the policy loans (CNY1 trillion) coming due this month, and the overnight repo rate fell by seven basis points to 1.78%, the lowest in three weeks.


Tensions between the UK and EU appeared to have taken a step away from the brink. A deal on medicine supplies from other parts of Great Britain to Northern Ireland may have been the critical catalyst. Reports suggested a de-escalation of UK rhetoric threatening to invoke Article 16, which allows for unilateral over-riding of the Northern Ireland Protocol under certain circumstances of serious economic, environmental, or societal risks.

Separately, two polls have begun showing Labor is edging ahead of the Tories. The Opinium poll (published in the Guardian) gave Labor a one percentage point lead, the first since January. The Savanta Com Res poll (for the Daily Mail) put Labor ahead by six percentage points at 40%. The main issue appeared to be Prime Minister Johnson's handling of several ethics issues. His personal support has also waned.

The US was warning at the end of last week that Russian may be preparing to invade Ukraine. Moscow seemed to be acting out of fear, fear of the US and Europe creeping presence in Ukraine. If Ukraine was going to remain independent, Russia insisted it can only be a (weak) buffer state. US rhetoric seemed aggressive in Moscow.

Last month US Defense Secretary Austin argued that no third country (i.e., Russia) had a veto over NATO membership decision (i.e., Ukraine). Poland, Lithuania, and Latvia were considering formally requesting NATO consultations, while the EU was expected to announce new sanctions on Belarus later today.

Separately, we note reports that India has begun taking delivery of the S-400 air defense missile system from Russia (part of a $5.5 bln deal), which was the same that earned Turkey American sanctions.

The euro edged above the pre-weekend high, but the tone remained fragile, and for the third consecutive session wasn't unable to resurface above old support at $1.1500. Since the US CPI report in the middle of last week, it has fallen, and the sideways movement could alleviate the overextended technical condition.

Sterling extended its pre-weekend recovery to reach $1.3440 before sellers reemerged to knock it to the session low of almost $1.3400. We suspect it can move higher in North America today and target the $1.3480 area.


The US seemed more eager for the Biden-Xi call than Beijing  Expectations should be low, and with no actionable outcome likely (not even a statement), there appeared to be little reason to spin it as a virtual summit. The top officials and the senior staff of the two largest economies should talk. Previously, there were high-level meetings regularly. Since their last call, a new US-UK-Australian alliance was announced that will result in Australia acquiring nuclear-powered submarines, and it was confirmed that the US has had military personnel in Taiwan since last November.

China continues with its intimidation campaign of repeatedly entering Taiwan's air-identification zone. China's assessment of the US was unlikely to have changed. Beijing sees the same thing many others do. Biden's approval rating has fallen to near 41%, and less than that has a favorable view of his handling of the economy. At the end of last week, the University of Michigan's consumer sentiment measure (preliminary November) fell to its lowest in a decade.

Surveys continued to point to the likelihood that the Democratic Party will lose both houses of Congress in next year's mid-term. And to underscore the pressure on Biden, the US Court of Appeals (5th Circuit) sustained a block on OSHA's ordered vaccine mandate (or weekly test). With the sixth plenum over, Xi has, by all accounts, confirmed his ascendancy and domination of Chinese politics for years to come.

The week's economic calendar for the US begins off slowly. The November Empire State manufacturing survey is on tap. It has been in a sawtooth pattern, alternating between gains and losses for the past five months. It fell sharply (19.8 from 34.3) in October and was expected to have turned up in November. The US reports October retail sales and industrial production figures tomorrow. Fed officials begin taking to the public stage starting tomorrow. Over the course of the week, around 11 officials have been scheduled to speak. In addition to US bills, the Treasury Dept. sells 20-year bonds, whose auctions have been among the most challenging for coupons, and 10-year TIPS at the end of the week.

Canada reports September manufacturing and wholesale sales today, but the October existing home sales may be more important. Tomorrow Canada reports housing starts, but the highlight of the week is Wednesday's October CPI. Price pressures are accelerating in Canada, and the headline CPI is likely to move toward 5% (4.4% in September). The swaps market is pricing in about 65 bp of tightening in six months.

This week, Mexico has a light economic diary after last week's higher than expected CPI (6.24%) and Banxcio's 25 bp rate hike (to 5%). Brazil also has a light economic calendar this week. Last week featured a further rise in (IPCA) CPI (10.67% vs. 10.25%) and weak September retail sales (-1.3% vs. -0.6% median forecast in Bloomberg's survey after a revised -4.3% fall in August).

Last week's US CPI shocker saw the greenback jump from around CAD1.24 to slightly above CAD1.26, roughly the 50% retracement of the slump from CAD1.2900 on Sept. 20. It settled last week on a soft note, and some follow-through selling has seen the US dollar eased to about CAD1.2525. A break here sees CAD1.2500 and then possibly CAD1.2470.

Since last September, the greenback has moved into a new and higher range against the Mexican peso. It has not traded much below MN20.12. Nor has it spent much time above MXN20.90. It has been in the pre-weekend range (~MXN20.45-MXN20.72). Look for the consolidative day to continue through the local session.

The Brazil real was the strongest emerging market currency last week, rising almost 1.6% against the US dollar. The US dollar found support around BRK5.40. Trendline support (from June, August, and September lows) and the 200-day moving average were near BRL5.36.

The U.S. Dollar Slips At The Start The New Week

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The U.S. Dollar Slips At The Start The New Week

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